Oil's Next Big Surge

Crude oil prices are back above $85 and seem ready to breach $90. The leg from $69 to $85 which began in February had hit a plateau, but optimism about the global economic recovery is likely to continue as its pace of the recovery in the developed world quickens. The World Bank revised its estimate of global GDP growth higher to 4.25% for 2010. It said China’s growth would top 10% and India would not be far behind at about 8%. There is even some hope that the US GDP rate could be 4% for the first and second quarters, which is a full point ahead of recent estimates. Some of that is because earnings from most large public companies have been well beyond expectations.

Gasoline prices last week stayed above $2.84 per gallon and premium is well above $3 in many regions. This does not seem to have cut into driving time or car sales. The price per gallon is still nowhere near the $4 it approached two summers ago. It may be the US consumer has become steeled to the rising cost of fuel as a percentage of the cost of living.

Spring is not a typical time for oil prices to face upward pressure. The summer travel season in the US has not begun. Most regions in the Northern Hemisphere are warm enough now that heating oil use has dropped. But, maybe oil traders have turned away from American as a reliable barometer for crude demand.

China’s demand for crude oil grew over 12% in March. New car sales in the nation reached 13 million last year and are expected to be closer to 16 million this year, passing the record years of sales in the US in 2006 and 2007. Refining capacity at China’s largest energy companies, which include PetroChina (NYSE: PTR) and China Petroleum (NYSE: PTR), have been build rapidly over the last year. China can take in more oil and process it quickly. Refining is not the bottle neck that it once was.

OPEC production has been flat this year, even as crude prices rise. The cartel is either production-constrained, which is not likely, or would like to make as much money on $80 crude as its can. After a year of low oil prices the member nations need to refill their treasuries.

There are very few reason for crude to drop back to $70 and a multitude of reasons that it’s a race to over $90.

Douglas A. McIntyre

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